CITIZENS FINANCIAL SERVICES, INC. REPORTS UNAUDITED THIRD QUARTER 2023 FINANCIAL RESULTS

MANSFIELD, Pa., Oct. 23, 2023 /PRNewswire/ -- Citizens Financial Services, Inc. (Nasdaq: CZFS), parent company of First Citizens Community Bank, released today its unaudited consolidated financial results for the three and nine months ended September 30, 2023.

Highlights

• The third quarter of 2023, represents the first full quarter that the acquisition of HV Bancorp, Inc. ("HVB") is included in the Company's financial results. The acquisition of HVB in the first half of 2023 contributed significant growth to net interest income in the third quarter of 2023. Merger and acquisitions costs for 2023 total $9.3 million through September 30, 2023. The provision for credit losses on non-purchase credit deteriorated loans (the "NPC Provision") was $4.6 million.
• Net income for the first nine months of 2023 was $10.3 million, which was $10.9 million, or 51.5% less than 2022's net income through September 30, 2022 due to the one-time merger and acquisition costs and the NPC Provision. The effective tax rate for the first nine months of 2023 was 16.4% compared to 17.9% in the comparable period in 2022.
• Net income was $7.5 million for the three months ended September 30, 2023 and 2022. The effective tax rate for the three months ended September 30, 2023 was 17.5% compared to 18.0% in the comparable period in 2022.
• Net interest income before the provision for credit losses was $58.4 million for the nine months ended September 30, 2023, an increase of $5.6 million, or 10.5%, over the same period a year ago.
• Return on average equity for the three and nine months (annualized) ended September 30, 2023 was 10.10% and 5.21% compared to 13.34% and 12.77% for the three and nine months (annualized) ended September 30, 2022. If the death benefits received from life insurance on a former employee, the one-time costs associated with the acquisition and the NPC Provision are excluded, the return on average equity for the three and nine months (annualized) ended September 30, 2023 would have been 10.50% and 10.76%, respectively (1).
• Return on average tangible equity for the three and nine months (annualized) ended September 30, 2023 was 14.37% and 6.56% compared to 15.60% and 15.00% for the three and nine months (annualized) ended September 30, 2022. (1) If the death benefits received from life insurance on a former employee, the one-time costs associated with the acquisition and the NPC Provision are excluded, the return on average tangible equity for the three and nine months (annualized) ended September 30, 2023 would have been 14.94% and 13.56%. (1)
• Return on average assets for the three and nine months (annualized) ended September 30, 2023 was 1.02% and 0.53% compared to 1.31% and 1.27% for the three and nine months (annualized) ended September 30, 2022. If the death benefits received from life insurance on a former employee, the one-time costs associated with the acquisition and the NPC Provision are excluded, the return on average assets for the three and nine months (annualized) ended September 30, 2023 would have been 1.06% and 1.09% (1).

Nine Months Ended September 30, 2023 Compared to 2022

• For the nine months ended September 30, 2023, net income totaled $10,271,000 which compares to net income of $21,185,000 for the first nine months of 2022, a decrease of $10,914,000. Basic earnings per share of $2.40 for the first nine months of 2023 compares to $5.28 for the first nine months last year. Annualized return on equity for the nine months ended September 30, 2023 and 2022 was 5.21% and 12.77%, while annualized return on assets was 0.53% and 1.27%, respectively. If the death benefits received from life insurance on a former employee, the one-time costs associated with the acquisition and the NPC Provision are excluded, basic earnings per share, the annualized return on average equity and average assets would be $4.95, 10.76% and 1.09%, respectively. (1)
• Net interest income before the provision for credit loss for the nine months ended September 30, 2023 totaled $58,405,000 compared to $52,837,000 for the nine months ended September 30, 2022, resulting in an increase of $5,568,000, or 10.5%. Average interest earning assets increased $319.8 million for the nine months ended September 30, 2023 compared to the same period last year, primarily due to the HVB acquisition and growth that occurred in the second half of 2022 in the Delaware market. Average loans increased $356.6 million while average investment securities increased $10.7 million. The yield on interest earning assets increased 1.13% to 4.91%, while the cost of interest-bearing liabilities increased 160 basis points to 2.11% due to the rise in market interest rates and competitive pressure. The tax effected net interest margin for the nine months ended September 30, 2023 was 3.25% compared to 3.39% for the same period last year.
• The provision for credit losses for the nine months ended September 30, 2023 was $5,328,000 compared to $1,425,000 for the nine months ended September 30, 2022, an increase of $3,903,000. As a result of the acquisition, the Bank recorded a $4.6 million provision for credit losses for loans acquired that did not have any credit deterioration at the time of purchase. Excluding the impact of the acquisition, the provision would have decreased $688,000 when comparing the nine month period of 2023 to 2022 with the decrease being attributable to lower loan growth in 2023 compared to 2022.
• Total non-interest income was $8,251,000 for the nine months ended September 30, 2023, which is $824,000 more than the non-interest income of $7,427,000 for the same period last year. The primary driver was revenues associated with the HVB acquisition, which includes additional service charge revenue, earnings on bank owned life insurance and gains on loans sold. In addition to the earnings on bank owned life insurance obtained as part of the acquisition, the Company received $195,000 of death benefits upon the passing of a former employee.
• Total non-interest expenses for the nine months ended September 30, 2023 totaled $49,037,000 compared to $33,045,000 for the same period last year, which is an increase of $15,992,000, or 48.39%. The primary driver of the increase is the merger and acquisition costs of completing the HVB acquisition that total $9,269,000. Merger and acquisitions costs for the merger with HVB include professional and consulting fees, printing, travel, contract termination payments and severance related expenses. Salary and benefit costs increased $4,769,000 due to an additional 35.3 FTEs due to the acquisition, merit increases for 2023 as well as an increase in health insurance costs of $685,000. The increases in occupancy and furniture and fixtures was due to the acquisition and additional branches as part of it. Due to growth that occurred in 2022 and the acquisition, FDIC insurance expense increased $560,000.
• The provision for income taxes decreased $2,589,000 when comparing the nine months ended September 30, 2023 to the same period in 2022 as a result of a decrease in income before income tax of $13,503,000 primarily due to the one-time merger costs.

Three Months Ended September 30, 2023 Compared to September 30, 2022

• For the three months ended September 30, 2023, net income totaled $7,548,000 which compares to net income of $7,544,000 for the comparable period of 2022, an increase of $4,000. Basic earnings per share of $1.61 for the three months ended September 30, 2023 compares to $1.88 for the 2022 comparable period. Annualized return on equity for the three months ended September 30, 2023 and 2022 was 10.10% and 13.34%, while annualized return on assets was 1.02% and 1.31%, respectively. If the death benefits received from life insurance on a former employee, the one-time costs associated with the acquisition and the NPC Provision are excluded, basic earnings per share, the annualized return on average equity and average assets would be $1.67, 10.50% and 1.06%, respectively. (1)
• Net interest income before the provision for credit loss for the three months ended September 30, 2023 totaled $22,404,000 compared to $18,846,000 for the three months ended September 30, 2022, resulting in an increase of $3,558,000, or 18.9%. Average interest earning assets increased $532.1 million for the three months ended September 30, 2023 compared to the same period last year as a result of the HVB acquisition. Average loans increased $543.4 million while average investment securities decreased $19.1 million. The tax effected net interest margin for the three months ended September 30, 2023 was 3.29% compared to 3.44% for the same period last year, which was impacted by the increase in the average cost on interest bearing liabilities of 187 basis points, to 2.56%.
• The provision for credit losses for the three months ended September 30, 2023 was $475,000 compared to $725,000 for the three months ended September 30, 2022, a decrease of $250,000. The decrease in the provision is due to lower loan growth in the third quarter of 2023 compared to the same period in 2022.
• Total non-interest income was $3,797,000 for the three months ended September 30, 2023, which is $1,105,000 more than for the comparable period last year. The primary driver was the impact of the acquisition, which increased service charge revenue, gains on loans sold and earnings on bank owned life insurance. In addition to the impact of the acquisition on earnings on bank owned life insurance, the Company received $195,000 of death benefits upon the passing of a former employee.
• Total non-interest expenses for the three months ended September 30, 2023 totaled $16,579,000 compared to $11,614,000 for the same period last year, which is an increase of $4,965,000. Merger and acquisition costs totaled $623,000 for the third quarter of 2023. Salaries and benefits increased $3.2 million due to an increase in headcount of 88 FTEs as a result of the acquisition. The increases in occupancy and furniture and fixtures was due to the acquisition and additional branches as part of it. Due to growth that occurred in 2022 and the acquisition, FDIC insurance expense increased $215,000.
• The provision for income taxes decreased $56,000 when comparing the three months ended September 30, 2023 to the same period in 2022 as a result of a decrease in income before income tax of $52,000 and earnings on bank owned life insurance being exempt from Federal income tax. The effective tax rate was 17.5% and 18.0% for the three months ended September 30, 2023 and 2022, respectively.

Balance Sheet and Other Information:

• At September 30, 2023, total assets were $2.96 billion, compared to $2.33 billion at December 31, 2022 and $2.35 billion at September 30, 2022.
• Available for sale securities of $417.8 million at September 30, 2023 decreased $21.7 million from December 31, 2022 and $27.4 million from September 30, 2022. As part of the HVB acquisition, $79.2 million of available for sale securities were acquired, of which $76.1 million were sold prior to June 30, 2023. The yield on the investment portfolio increased from 1.83% to 2.18% on a tax equivalent basis.
• Net loans as of September 30, 2023 totaled $2.22 billion and increased $518.5 million from December 31, 2022 as a result of the acquisition. Excluding the acquisition, loans would have increased $42.2 million during 2023.
• The allowance for credit losses - loans totaled $21,455,000 at September 30, 2023 which is an increase of $2,903,000 from December 31, 2022 and is due to the acquisition and the implementation of the CECL accounting standard effective January 1, 2023. The impact of the acquisition was an increase of $6.3 million, of which $4.6 million was in provision with the remaining $1.7 million due to purchase credit deteriorated ("PCD") loans. The impact of adopting ASC 326 was a decrease of $3.3 million in the allowance for credit losses – loans. Loan recoveries and charge-offs were $41,000 and $819,000, respectively, for the nine months ended September 30, 2023. Of the $819,000 charge-off, $763,000 was related to a loan acquired as part of the acquisition that was fully reserved at the time of the acquisition. A provision for credit losses – loans of $701,000 was recorded during 2023. The allowance as a percent of total loans was 0.96% as of September 30, 2023 and 1.05% as of December 31, 2022.
• Deposits increased $490.9 million from December 31, 2022, to $2.33 billion at September 30, 2023, due to the acquisition, which increased deposits by $533.4 million. Excluding the acquisition, deposits decreased $42.4 million. With the rise in market interest rates, competitive pressure for deposits has increased. Additionally, we have numerous state and political organizations as customers who utilized funds during the first half of 2023 for various projects and bond payments. At September 30, 2023, the Bank estimates that balances held by customers in excess of the FDIC insurance limit ($250,000 per insured account) totaled $1.08 billion, or 46.4% of the Bank's total deposits. Included in this balance are balances held through Intrafi, which provides customers with FDIC insurance coverage by placing customer funds with insured banks within the Intrafi network, as well as deposits collateralized by securities (almost exclusively municipal deposits). The total of these items was $491.6 million, or 21.1% of the Bank's total deposits, as of September 30, 2023.
• Stockholders' equity totaled $262.7 million at September 30, 2023, compared to $200.1 million at December 31, 2022, an increase of $62.5 million. The increase was attributable to issuing 693,858 shares with a value of $60.1 million as part of the acquisition and net income for the nine months ended September 30, 2023 totaling $10.3 million, offset by net cash dividends for the first nine months of 2023 totaling $6.2 million, net treasury stock activity of $99,000 and an increase of $1.8 million attributable to the CECL adjustment made effective January 1, 2023. As a result of changes in market interest rates impacting the fair value of investment securities and swaps, accumulated other comprehensive loss increased $3.5 million from December 31, 2022.

Dividend Declared

On September 1, 2023, the Board of Directors declared a cash dividend of $0.49 per share, which was paid on September 29, 2023 to shareholders of record at the close of business on September 15, 2023. The quarterly cash dividend is an increase of 3.1% over the regular cash dividend of $0.475 per share declared one year ago, as adjusted for the 1% stock dividend declared in June 2023.

Citizens Financial Services, Inc. has nearly 1,925 shareholders, the majority of whom reside in markets where its offices are located.

Note: This press release may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are not historical facts; rather, they are statements based on the Company's current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions. Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company's actual results, performance and achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, changes in general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; and other factors disclosed periodically in the Company's filings with the Securities and Exchange Commission. Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this press release or made elsewhere periodically by the Company or on its behalf. The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.

(1) See reconciliation of GAAP and non-GAAP measures at the end of the press release